Introduction
The high voltage network in Europe was not designed with international energy trade in mind. The commercially availably cross-border transmission capacity is therefore rather limited and a lot of international transmission lines are congested.
As a truly integrated electricity market cannot exist as long as there is widespread congestion, the European Commission decided to expand the existing network.
Research Question
Who will pay for the expansion of the existing network?
Research Methodology
There are several sides to the research question:
- Which countries will benefit from new investments, and which countries will be hurt? What is considered fair?
- How large is the market distortion created by the pricing rules?
- Will the cost allocation rules give the right incentives for investments in generation capacity?
Currently I have only tackled the second question.
Ramsey pricing in congested networks with market power in generation
I derived the socially optimal transmission prices in socially optimal transmission prices in a congested electricity network when there is imperfect competition in generation, and when the budget constraint of the network operator is binding. The results that are derived are a generalization of the standard Ramsey prices and also of the locational marginal prices (LMP).
- Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium
The main conclusion of the paper is that not only the direct users of a new transmission line should pay for its construction, but all network users.